Voodoo Economics Revisited – Republicans and the Tax Cut Fallacy

Posted in General by TBartine on July 20, 2010 2 Comments

Think you know nothing about economics? Chances are you know more than you think…perhaps even more than the politicians currently sitting in the U.S.Congress.

YOU know that there are essentially two sides to the “balance sheet.” On one side is your “Assets/Revenue/Income“…the money that is coming in. On the other side is your “Liabilities/Debits/Expenses“…the money that is going out.

YOU know that these two sides, in conjunction, determine your bottom line…which is to say, whether or not you are making money (in budgeting, we call this a “surplus) or losing money (in budget terms, a “deficit).

Republicans are currently trying to tell us (examples here, here, and here from Huffington Post) that spending money, like extending unemployment benefits, increases the deficit and is, therefore, BAD. They say all measures to spend money MUST be offset by reduced spending in other areas.

In principle, this is TRUE. Yes – adding expenses without either increasing revenue or decreasing expenditures somewhere else…would increase the deficit. File that little equation under “D” for “Duh.”

They also tell us that reducing revenue, for example the Bush tax cuts for the wealthy, does not increase the deficit and is, therefore, GOOD. They say these tax cuts do not require that either more taxes be collected somewhere else, or that spending be decreased to offset their effect.

That much, is FALSE…and is, perhaps, the most irresponsible rationale we’ve heard used to justify what amounts to little more than partisan political hackery. Your average person with no financial education whatsoever can see that decreasing the amount of tax revenue without increasing revenue somewhere else or decreasing expenses WOULD increase the deficit.

See the attached graph…and you’ll see that tax cuts, in fact, have a bigger impact on increasing the deficit than two foreign wars, stimulative spending, and entitlement programs:

Source: Center on Budget and Policy Priorities

This particular deception…is nothing new.  Once upon a time, in our not-so-distant past, a man named George Herbert Walker Bush (a Republican) ran against another man named Ronald Reagan (also a Republican) for President of the United States.  Reagan espoused an idea that has come to be known as “Supply Side Economics.” Essentially, this theory holds that reducing taxes on the private sector will lead to significant economic growth…enough growth to offset the loss of tax revenue.  Bush, in challenging Reagan’s proposal, would famously call this “voodoo economics.“  Watch part of the debate between the two men:

Reagan would later go on to win the election, and today he is viewed by many in the Republican Party to be a “true conservative hero,“ a sort of epitome of what Republicans are “supposed to be.” But the truth is that his presidency, in many ways, represented an END to responsible, fiscal conservatism, and it was during his presidency that America’s federal deficit, and our national debt, SKYROCKETED.

In fact, if we look at the increase in the national debt while the last two Democrats were in office, Carter and Clinton, we saw increases of 42% and 36%, respectively.

While Reagan, following “tax cut ideology,” was President…the National Debt increased by 182%.

George H. W. Bush, who initially lambasted “tax cut ideology,” only to later adopt it himself….saw an increase of 55%.

George W. Bush, also added MORE tax cuts…and saw an increase of 89%.

Wait a minute.  Here are the Republicans, claiming STILL to be the party of “fiscal responsibility and conservatism,” and they are spending us into MORE debt than the Democrats, and are continuing to reduce our tax revenue through tax cuts, creating a LARGER deficit than under Democrats.  How exactly is this methodology either “responsibleORconservative?”

And what’s worse, they continue to spout the SAME lie as before.  Just this month, Mike Pence (R-Ind.) said, “The reality is that as you study — when President Kennedy cut marginal tax rates, when Ronald Reagan cut marginal tax rates, when President Bush imposed those tax cuts, they actually generated economic growth, they expand the economy, they expand tax revenue.“  Senator Kyl (R-Az.) has echoed this idea, as have Mitch McConnell (R-KY) and many others in the GOP.  Unfortunately for Pence, and for all of us, what he says is clearly NOT reality.  George W. Bush’s economic policy group told him tax cuts would not generate enough growth to make up for the lost revenue. Bush’s Chief Economist was even more direct about this when he said, “You are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one.

And yet so many Americans, seduced by the idea of tax cuts and ignoring their own common sense, still accept and repeat the GOP’s fiscal mantra: “Tax cuts pay for themselves.

I love a good ideological debate, and there are a great many that we can have…but is it necessary for us to debate an issue where one side’s position is completely, demonstrably false?  Must we continue to listen to the same people who ballooned our debt and our deficit, by cutting tax revenues while spending as if the money were on fire…tell us that they deserve to be elected back into office because they have the solution to the problem: More tax cuts and responsible spending…the latter of which they proven incapable of doing?  For how long, in the face of overwhelming evidence to the contrary and amidst the screaming of expert economists, must Americans still see the GOP as the party of “foreign policy and fiscal responsibility?

An Analogy:  You are very sick.  You go to a doctor who says he has a revolutionary, “proven” cure (although he can’t produce any proof of it actually working) called “slap therapy.“  He slaps you…nothing happens, you’re still sick.  He says, “Well, you have to do it more than once,” and slaps you again…but you’re still sick.  You decide to try another doctor who has an actual, proven, documented therapy which has helped millions of people…but it will take months of treatment, and the treatment is uncomfortable.  You try it, but after a few weeks you are tired of the discomfort and waiting so you go back to the first doctor.  He says he has the answer to your problems: “slap therapy.”  And the slapping begins anew…

America…aren’t you tired of getting slapped?

Be Sociable, Share!
Comments
  • quendor:

    You might want to make some adjustment to the language you used. The balance sheet description is wrong. Assets = Liability + Owner’s Equity. So, you’ll have entries both in assets, and in either liabilities or equity. Further, each entry is either a credit or a debit (if it’s a credit for an asset, it’s a debit for liability or equity, and vice versa).

    • I appreciate your clarifications, and you’re correct…in an attempt to use language that people would be most familiar with (most folks are likely not too familiar with formal bookkeeping) I did use some terms improperly. The overall point I was trying to make boils down to this: “budget surplus/deficit = money in minus money out,” in an effort to help people understand that a deficit may be worsened EITHER by failing to reduce spending OR by reducing revenue. That being said, again, you are completely correct: The accounting of assets, and the liability or equity held in those assets, is significantly more involved…assets are not a simple “plus column” entry. Thank you for taking the time to contribute this!